A fresh report from a Toronto-based firm with a $10 billion stake in real estate investments around the globe says real estate is currently priced at bargain basement prices.
The report from Hazelview Investments says after a devastating blow from the 2020 pandemic, and single-digit gains in 2024, real estate investment trusts (REITs) are ripe for the picking with low valuations not seen in a decade.
According to the report, Hazelview’s value model “implies a 20 per cent upside price from current levels” in sectors and regions led by data centres, senior housing, housing in Europe and even hotels in Japan.
That level of real estate diversification stands in stark contrast to the average Canadian retirement portfolio with a real estate weighting limited exclusively to the roof over their heads or a second property.
As high-ish interest rates cool the housing market and government incentives to invest in second properties evaporate, REITs can be an ideal real estate alternative in any portfolio; especially for Canadians who don’t own homes.
REITs are publicly traded companies that own or finance income-producing real estate. They aim to generate a steady flow of income - essential for retirement investors who rely on safe cash - and can grow in value with the broader real estate market.
Spreading risk through diversification
Risk from investing in individual real estate holdings like homes and secondary properties is concentrated to one sector (residential real estate) in one geographic region (that location).
In contrast, REITs have many real estate holdings diversified by sub-sectors including residential, commercial and industrial.
There’s no limit to how diversified a REIT can be. InterRent REIT and Killam Apartment REIT, as examples, hold multi-unit residential properties across Canada. BTB REIT holds commercial, office and industrial properties concentrated in Quebec. RioCan and Smart REITs hold traditional bricks and mortar retail businesses.
REITs can hedge risk further by offsetting sub-sectors against each other as the real estate landscape changes. Brick and mortar retail REITs hit hard by the pandemic and the growing online shopping trend, for example, can be offset with retail REITs that hold industrial properties specializing in warehousing, logistics and distribution.
Other REITs capitalize on shifting demographics by investing in seniors housing as the influx of baby boomers age.
In addition to being diversified, REITs are a natural fit with other sectors and asset classes in a broader retirement portfolio. Equity in an individual property can also compliment a broader retirement portfolio but determining how it interacts from a diversification and tax perspective can be difficult.
Tax advantages
While capital gains on the sale of a principal residence are not taxed, half (or more for large amounts) of capital gains on secondary properties are taxed, just like most other equity investments.
One tax advantage a REIT has over a secondary property is its ability to avoid taxation all together if it is held in a tax-free savings account (TFSA).
Contributions to a REIT in a registered retirement savings plan (RRSP) can also be deducted from taxable income and grow tax free over several years until it is withdrawn.
Those tax advantages can be multiplied by homeowners who leverage the equity in their principal residences to make large investments in REITs instead of secondary properties.
Avoid the landlord hassle
Most smaller landlords know the burden of having to deal with faulty plumbing in the middle of the night, but it’s just the tip of the iceberg when it comes to legal liabilities and endless government regulation, not the mention the need to retain paying tenants or the nightmare of having to evict deadbeat ones.
All that becomes the REIT manager’s problem. Administration and maintenance are part of the operating budget.
Annual fees on most REITs are far below one per cent, which is often compensated over the long term by annual yields from rental payments.